The “marriage penalty” in Washington state’s new tax raises controversy

A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide for the high-net-worth investor and consumer. subscription To receive future issues, directly to your inbox.

Washington state’s proposed new income tax includes the largest “marriage penalty” in the country, imposing higher taxes on some couples who file jointly, according to tax experts.

The state House of Representatives approved Washington’s first-ever income tax, imposing a 9.9% tax on income over $1 million annually. Having also passed the state Senate, it will now go to the governor, who plans to sign it into law. Washington is currently one of only nine states without a state income tax, and the new rate would be one of the highest in the country.

While Democratic lawmakers call it the “millionaire’s tax,” some taxpayers who earn much less as individuals would also be subject to the tax thanks to the hefty marriage penalty. According to the legislation, the $1 million tax threshold applies to individuals, spouses and domestic partners. So, if each spouse makes $600,000, their combined income of $1.2 million would trigger the tax.

“Under the law, it doesn’t matter if you’re single or married, the exemption is $1 million,” said Joe Whalen, a lawyer who advises companies and technology founders in Washington. “It should be called the half-millionaire tax.”

While marriage penalties are not uncommon in state or federal tax laws, Washington’s penalties are notable for their size. Most states use two income thresholds for tax brackets, one for individuals and one for couples that are usually twice as high. Some high-tax states, such as California and New York, apply marriage penalties only to the highest earners, according to the Tax Foundation, a nonprofit tax policy think tank.

In New York, for example, the income thresholds for each bracket for joint filers are doubled by a 9.65% rate, which applies to income over $1,077,550 for single filers and $2,155,350 for joint filers. But for the additional millionaire tax rates of 10.3% and 10.9% — which are relevant for those with income exceeding $5 million and $25 million, respectively — the income thresholds are the same for joint and single filers.

In California, the bracket thresholds are double for joint filers, with the exception of the 1% Mental Health Services Act, which applies to income over $1 million for both single and married filers.

Jared Walczak, a fellow at the Tax Foundation, said the marriage penalties in New York and California are relatively small, amounting to a 1% tax rate difference in California and a 0.65% difference in New York. But in Washington state, the difference can be as high as 9.9%.

“In the extreme case, if you had two single people who earned exactly $1 million, they would owe $0, but if they were married and had the same income, they would owe $99,000,” he said. “Washington marriage penalty will be largest ever.”

Democratic state lawmakers and the governor did not specifically address concerns about the marriage penalty. The standard deduction of $1 million per household is the same structure used in the state’s capital gains excise tax, which voters passed in 2021, said State Sen. Noel Frame, who leads fiscal policy for Democrats in the state Senate.

“As we work to make the two separate tax structures work together, consistency in deduction helps with tax administration by our Department of Revenue and simplicity for taxpayers,” she said in a statement. “Since the tax does not apply to income under $1 million, there are many high-income couples who still will not see much of a tax impact even if their combined income is more than $1 million.”

However, in a country that relies on highly skilled, high-wage workers in companies like… Amazon, Microsoft And other technology companies, analysts said, many dual-income households may be exposed to the tax.

“There’s this idea that we’re only taxing rich people on yachts,” said Brian Heywood, a Washington hedge fund manager who founded Let’s Go to Washington, a conservative political action committee that opposes the tax. “They’ve been less honest about who they’re going after and what the numbers are.”

Wallen joked that some dual-income couples may explore legal divorce for tax reasons, even if they want to remain physically married. “The tax savings alone will cover the costs of a divorce attorney,” he said.

The marriage penalty is the latest controversy over a new income tax in Washington, which has become a beacon in the Democratic Party’s movement to raise taxes on the wealthy. From Rhode Island and New York to Virginia and Michigan, Democrats in state legislatures are seeking to confront rising inequality and cuts in federal funding for health care by raising taxes on the highest earners. California is considering a ballot initiative to create the state’s first wealth tax, to tax the total net worth of the state’s billionaires.

Washington will be a closely watched experiment in the debate over the impact of higher state taxes on wealth migration.

Two of the state’s most famous entrepreneurs — Amazon’s Jeff Bezos and Starbucks’ Howard Schultz — have already left the state for Florida, which has no income tax. Bezos announced his move to Miami in 2023, after the state’s new 7% capital gains tax took effect. He sold more than $9 billion worth of Amazon stock in 2024, effectively saving more than $600 million in capital gains taxes he would have had to pay to Washington state.

Schultz recently announced that he has moved on from Seattle after 44 years. He said his family office will also move to Miami, but his organization will continue to operate in Seattle.

“We hope Washington continues to be a place of thriving business and entrepreneurship, creating essential opportunities for the people of Seattle and surrounding areas,” he wrote.